Nuclear fiasco in Florida vexes Progress Energy

Insurer balks at paying for $2.75 billion blunder in Florida

jmurawski@newsobserver.comMarch 1, 2012 

Progress Energy can congratulate itself for skirting major controversy at its three nuclear plants in the Carolinas in recent years. But 700 miles south of here, the Raleigh-based utility's nuclear plant in Florida is experiencing one of the most exorbitant and bewildering mishaps in the history of the nation's nuclear industry.

The Crystal River nuclear plant, on Florida's west coast, has been shut down since the fall of 2009 and is expected to remain off-line until at least 2014 - that is, if the company decides to resurrect the damaged facility at all.

The bill for repairs and replacement power could top $2.5 billion, and it's been unclear who - company shareholders or its Florida customers - will cover those costs since the utility's insurer stopped paying claims in mid-2011.

In the coming months, Progress is expected to disclose an updated cost estimate for rebuilding the Crystal River facility. The company is also awaiting a decision from the insurer as to whether the claims will be paid or whether Progress will have to appeal to an arbitrator.

The nuclear fiasco has no direct bearing on customers in North Carolina, because the Florida utility is operated separately from the Carolinas utility. But it could result in steep bill increases for the company's Florida customers, who already pay about $124 a month for power.

It could also dilute the benefits of Progress's pending $26 billion merger with Charlotte-based Duke Energy by introducing a costly liability. But Progress CEO Bill Johnson has told company employees in the past that the rationale for the merger is rising operating costs, including unforeseen financial calamities like the Florida setback.

"What's happened here is a first of its kind," said Florida Public Counsel J.R. Kelly, that state's consumer advocate. "There's nothing like this that's ever occurred in the world."

The problems experienced at Crystal River stem from a botched attempt to replace the plant's steam generator. The replacement required cutting a giant hole - measuring 23 feet by 27 feet - in the 42-inch-thick protective wall of the building that contains the nuclear reactor. To save money, Progress opted to manage the project on its own and awarded the contract to an engineering firm that had no experience in such repairs.

The work resulted in three instances of "delamination," a term used to describe an internal separation of the building wall. Each delamination is the size of a basketball court, said Florida's Deputy Public Counsel, Charles Rehwinkel. "They were definitely three separate events, or discrete incidents," he said.

The blunder shows that a highly experienced nuclear operator with a sterling reputation in the industry is not immune from unforeseen miscues that raise questions about judgment and competence.

The sequence of mistakes has put Progress in a state of crisis management for more than two years. Company officials are dealing with persistent questions from Wall Street analysts while they negotiate data requests from the insurer, Nuclear Electric Insurance Limited, known as NEIL.

The case rides on NEIL's decision whether it is obligated to pay up to $2.75 billion for repairs and replacement power under its confidential contract with Progress. Because NEIL was not expected to voluntarily pay the full coverage Progress sought last year, the utility suspended recording further insurance receivables in its corporate accounting statements. To date Progress has received $298 million in insurance payments, and the company stopped working on the Crystal River site last year to focus on refining its strategy and budget.

"We're not in a dispute yet," Progress CEO Bill Johnson told analysts two weeks ago. "We're still working positively and engaged with them on explaining what happened, what the repair plan is, and to make sure it's covered."

Earlier this year, Progress was able to avoid another dispute by reaching a rate settlement with Florida's consumer advocate, the Florida Public Counsel. That state agency had been building a negligence case against Progress to prevent the utility from passing on the repair and power costs to Florida customers. The Florida Public Counsel had conducted depositions with a dozen employees and contractors to expose errors and poor judgment, potentially leading to harmful disclosures that could have proved disastrous in Progress' negotiations with NEIL.

Payment expected

With the settlement done, Progress executives publicly express confidence that everything will work out. They say that NEIL, a pool created by the nation's nuclear operators, will ultimately agree to pay all claims, the full amount of which won't be known for several months. Kelly, the consumer advocate who wants to protect Florida customers from the staggering costs, agrees that the company is entitled to the insurance payments.

"It clearly was an accident," Kelly said.

The coverage from NEIL would make rebuilding the Crystal River facility the most economically feasible decision. It would prevent having to weigh whether to decommission the 36-year-old facility that provided about 8.5 percent of the electricity in Progress's Florida service area and its 1.6 million customers there.

It's not clear why NEIL has delayed payments, but Johnson said these cases can take months, and the Crystal River matter is by far the most complicated and costly NEIL has ever been asked to pay for. Johnson is a member of NEIL's board but as a matter of policy is not involved with the committee assigned to review Progress' claims, Kelly said.

NEIL, based in Delaware, declined to say what its biggest payout has been to date. According to news reports, NEIL declined a $200 million claim in 2007 to the operator of the Davis-Besse Nuclear Power Station in Ohio, but malfunctions at that plant were so serious that they resulted in criminal charges against company employees.

Murawski: 919-829-8932

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